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    Introduction

   There are four factors of production – land, labour, capital and entrepreneurship.

  However, people are required to mobilize and prime these factors into

productive use at almost every level in order to achieve their desired objectives.

  It is a historical challenge and an unfolding saga as in how man has been able to

mobilize either individually or collectively together these varied factors of

production towards a common goal.

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  In the Middle Ages, land ownership and the distribution of land in exchange for

their loyalty stand at the heart of the “human resources” strategy.

  There was a time when landowners owned their labour in the literal sense of

owing them as slaves. This created lifelong obligations.

  In the modern era the services of people was secured in a civilized way called –

employment.  

The Opportunity – Shared Service & Outsourcing

  Shared services and outsourcing a means by which Human capital is procured

optimally.

  It opens up multitudes of methods by which the skill and dedication of a person

may he procured other than by way of employment.

  In a modern economy firms and people may for mutual advantage decide to

deal with one another without creating a relationship of employment.

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For example:

Massey V Crown Life Insurance Co. [1978] I.C.R 590  

•  For the last 100 years the law has drawn a distinction between a “ contract of

service” on the one hand and a “ contract for services”

•  He was the manager of the Ilford branch of the insurance company.

•  But in 1973 Mr. Massey went to his accountant who advised him to change his

relationship with the company. The accountant said: “I think you would be

much better off if you do arranged your affairs so as to be self-employed instead

of being a servant.

 

•  He went to the company and told them : “I have been advised by my

accountants to change over Scheduled D. Will you agree?” They said: “Oh, yes;

we are agreeable.” Instead of being called “ Mr. John L. Massey, “ he was called

“John L. Massey & Associates .” He registered that new name with the Register

of Business Names.

•  So far as his duties were concerned, the new agreement was in almost identical

terms as the previous one.

•  In November 1975 Mr. Massey was dismissed.

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•  The law, as I see it, is this : if the true relationship of the parties is that of master

and servant under a contract of service, the parties cannot alter the truth of that

relationship by putting a different label upon it.

•  On the other hand, if the parties’ relationship is ambiguous and is capable of

being one or the other, then the parties can remove that ambiguity, by the very

agreement itself which they make with one another.

  The question for an optimal mix confronts new and established firms.

  This is the root of outsourcing. People wanting to deliver services in a new and “non-conventional manner”.

The Challenges

 

  The difference between the new and old firm;

  How to deal with an existing workforce;

  Will employment law supervene.

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Common Forms of “Optimization” 

 

  There are innumerable methods in which relationships short of employment or

other than employment may be structured. The law does not define them with

exactitude.

  The legal system only provides for a framework in which contractual

obligations may be upheld. The basic fabric of this is provided for under the

Contracts Act 1950.

  It also to regulates certain kinds of businesses and professions e.g. Contracts Act

1950 has some provisions dealing with agency, there is specialized legislation for

Franchises and Direct Selling.

  Outsourcing and Independent Contracts

    Outsourcing is fuelled by:

•  Individuals who choose to work or render their services as independent

contractors rather than employees;

•  Individuals who choose to incorporate companies or business enterprises which

then operate as vehicles for offering services on a wider scale;  

•  Manpower suppliers who provide trained personnel to perform work that

would otherwise be performed by an employee;

•  Vendors or service providers who are able to offer a service to a firm that enables

them to exit from or stay out of an entire activity or part thereof – e.g.

warehousing, logistics, maintenance etc.

 

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The Supervening Nature of Employment Law – Individual Contracts

 

  The risk of employment law supervening into such a transaction is a real one.

This risk is rooted in the definition of “contract of employment”. Section 2 of the

Industrial Relations Act 1967 defines it as follows:

   “contract of employment” means any agreement, whether oral or in writing and

whether express or implied, whereby one person agrees to employ another as a

workman and that other agrees to serve his employer as a workman.

  The case law demonstrates the problem. In Hoh Kiang Ngan v Mahkamah

Perusahaan Malaysia & Anor [1995] 3 MLJ 369, the Federal Court per Gopal Sri

Ram JCA held:

•  “In our judgment, the correct test to be applied in determining

whether a claimant is a workman under the Act is that enunciated by

Chang Min Tat FJ in Dr A Dutt v Assunta Hospital [1981] 1 MLJ 304 at p

311. We accordingly hold that a workman under the Act is one who is

engaged under a contract of service. An independent contractor who

is engaged under a contract for services is not a workman under the

Act.”

•  “We take this view because it provides, as earlier observed, for a

flexible approach to the determination of the question. It is fairly plain

to see why flexibility is achieved by having resort to this test.”

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•  “In all cases where it becomes necessary to determine whether a

contract is one of service or for services, the degree of control which an

employer exercises over a claimant is an important factor, although it

may not be the sole criterion.”

•  “The terms of the contract between the parties must, therefore, first be

ascertained. Where this is in writing, the task is to interpret its terms in

order to determine the nature of the latter’s duties and functions.”

 

  This places firms in a difficult position. In that, they are entering into contracts

without any sense of assurance that the character of the contract will be held and

recognized to be what is stated therein.

  An individual who takes the position that he is actually an employee he may file

a representation under Section 20 of the 1967 Act.

  He would argue that there are “issues to be tried” and seek a reference to the

Industrial Court.

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  Menteri Sumber Manusia v John Hancock Life Insurance (Malaysia) Bhd &

Anor appeal [2007] 1 CLJ 366, the Court of Appeal recognized the right of the

Minister of Human Resources to refer a representation for reinstatement to the

Industrial Court where there was a dispute of fact as to whether a person is

indeed employed under a contract of employment.

  With this background, firms find themselves open to exploitation in such a

transaction. It has to face years of uncertainty which could decide not only the

fate of that contract but also the fate of every such contract.

  The risk of failure is not just back wages but the unknown risk of where the firm

stands in regard to back taxes EPF etc.  

  These risks are magnified when we bring into focus the present reality that

firms conduct joint training courses for employees and employees of vendors

alike, they participate in family days, they are present at annual dinners and

even win service awards.  

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   Outsourcing and Fixed Term Contracts

 

  Fixed term contracts and outsourced individuals go hand in hand. A fixed term

contract is a complex piece of work.

  It is not really a contract for services. The person concerned is very often an

employee. But the firm works in the belief that these contracts an end by

effluxion of time.

  It keeps the direct head count constant yet have the option of phasing in and

phasing out people through out the year.

  However the firm faces the challenge presented by the case of Han Chiang

High School/ Penang Han Chiang Associated Chinese Schools Association v

National Union of Teachers In Independent Schools, W. M’sia [1988] 2 ILR

December 611.

“10. The Court, however, is aware that one the other hand there are

genuine fixed term contracts, where both parties recognize there is

no understanding that the contact will be renewed on expiry. The

Court realizes that such genuine fixed-term contracts for temporary,

one-off jobs are an important part of the range of employment

relationships.

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The great thing is to make sure that the case is a genuine one ……

On the one hand, employers who have a genuine need for a fixed-

term employment which can be seen from the outset not to be

ongoing, need to be protected. On the other hand, employees have to

be protected against being deprived of their rights through ordinary

employments being dressed up in the form of temporary fixed-term

contracts. What are we saying in this judgment is that there is no

magic about fixed-term contracts; that they are not …… excluded

from the Act. (Terry v East Sussex Country Council, 1976, I. C. R. 536,

per Phillips J.)”

 

  What is the motivation for this? The obvious one is cost and efficiency.

  With the advance of technology and the escalating cost of capital, the challenge

of capital renewal and the knowledge that is needed to keep in step with it, there

is an advantage in exiting from certain activities and to vest them in a specialist

service provider.

  The firm is not only able to reduce its operating cost but the cost of the

consequent capital inputs may also be off loaded from its balance sheet.

  Its easy for a new firm. An existing firm has its own challenges. These

advantages can be easily grasped by a new firm. The case law is mixed as to

whether the decision to terminate employees in preference for an outsourced

service would be upheld.  

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  There are favorable trends in the case law for example:

In Kelab Sukan Pulau Pinang v Vijayapal Singh a/l Hira Singh [1997] 3 MLJ

421, His Lordship Mahadev Shanker JCA. A club decided to discontinue the

direct provision of F & B services and to contract the same out to contractor. A

restaurant captain and a food and beverage executive were retrenched. The

Industrial Court had ordered the reinstatement of the captain as it felt that it

was prudent for a club to have an additional captain as a back up for some of

its other outlets.

 

 

 

 

“At the time of the hearing in 1994, evidence was given that the

business in these bars was good. So the chairman decided that the

club should employ Singh as an additional captain because it

was prudent to have an extra captain when any of the other three

have their rest days or were on vacation, and he ordered the club

to reinstate Singh within one month with wages, increments and

bonus backdated to 15 September 1989.”

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“It does not seem to have occurred to the chairman that what he

was doing by compelling the club to reinstate Singh was to create a

post for him as a stand-by captain who would only have work as

and when any of the other captains fell ill, or were taking rest or

went on vacation. In other words, Singh would have been idle at

other times. To compound the error even further, the chairman

backdated Singh’s emoluments till 15 September 1989, when Singh

had done no work at all in the interim. What applies to Noor applies

equally to Singh. On the facts before him, the only finding possible

was that both jobs had become redundant.”    

“Transplanting” Staff  

  There is nothing to compel the staff to accept such on offer of employment from

an “acquirer” or “outsourced provider”.

  It is unlikely that any existing transfer clause would encompass mobility to a

third party company altogether.

  The only option left with the employer is Regulation 8. It encompasses a change

of ownership of the undertaking or part thereof.

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  Even the Regulation 8 does not compel mobility. It only motivates mobility by

disentitling an employee from termination benefits.

  It does not have the broad sweep of the Transfer Regulations practiced in

Europe, and its effectiveness is diluted by Collective Agreement containing

independent scheme of compensation.

  Regulation 8 of the Employment (Termination And Lay-Off Benefits),

Regulations 1980 provides as follows:

“(1) Where a change occurs (whether by virtue of a sale or

other disposition or by operation of law) in the

ownership of a business for the purposes of which an

employee is employed or of part of such business, the

employee shall not be entitled to any termination

benefits payable under these Regulations, if within

seven days of the change of ownership, the person by

whom the business id to be taken over immediately

after the change occurs, offers to continue to employ the

employee under terms and conditions of employment

not less favourable than those under which the

employee was employed before the change occurs and

the employee unreasonably refuses the offer.”

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  The requirements of reg. 8 may be summarized as follows:

•  There is a change in ownership of a business or part of a business;

•  The change concerns the employee’s employment;

•  An offer of employment is mad e within seven days of the said change by

the buyer;

•  Such offer being on equal or more favorable terms.

 

Outsourcing to a Firm

  This happens when: 

•   A third party supplies labour to a firm;

•  A third party provides labour and services to a firm.  

•  There is nothing in law which prohibits the use of these contracts, although

some employers have entered into collective agreements with unions to

regulate such contracts.

•  Unions have attempted at contain such arrangements.

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Unions have attempted at contain such arrangements.

E.g.:

Kesatuan Pekerja-pekerja Perusahaan Simen (SM) V. Lafarge Cement

Berhad [2013] 3 ILR 632.

•  [29] In the court's view, this is clearly a matter that falls outside the definition of

'trade dispute' and s. 13(3) of the IR Act in that:

(i) it relates to the recruitment function of the employer;

(ii) it is the prerogative of the company to determine which functions and

services to be undertaken directly and which ones are to be contracted out;

•  [30] This concept of company's prerogative was addressed by the High Court of

Australia in the case of  Jones v. Dept of Energy and Minerals  [1995] 60 IR 304,

where it stated as follows:

However, it is within the employer's prerogative to rearrange the organizational

structure by breaking up the collection of functions, duties and responsibilities attached

to a single position and distributing them among the holders of other positions,

including newly-created positions.

•  The Queen v. The Judges of the Commonwealth Industrial Court and Other; Ex Parte

Cocks And Others [1968] 121 CLR 31.

The question whether the practice of employing contractors in any particular industry

is undesirable and should be forbidden or regulated is a matter for the appropriate

legislature or legislatures and not for the Commission.

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•  It is useful, I think, to consider first whether a dispute between employers and

employees about the use by employers of independent contractors to do work

which could be done by  employees would be an industrial dispute. In other words,

would the rejection of a claim by employees to a monopoly of the employers' work

constitute an industrial dispute? I think not, because it would not be concerned with the

relationship of employers with employees. It would be concern with the possibility of a

relationship between employers and persons not employees... A dispute between

employers and employees whether employers should be prevented from engaging sub-

contractors is even further from the conception of an industrial dispute.

     However there are some legislative provisions which appear to piece the veil of these

third party contracts. Examples include:

•  The Employment Act 1955 under Part VII, imposes joint liability for principals

and contractors in relation to wages.  

•  The Occupational Safety and Health Act 1994 imposes obligations on an

occupier and it also imposes a duty over persons whom the employer has

control or would have had control over “but for any agreement between the

employer …and the independent contractor to the contrary”.

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•  The Employment Restriction Act and the related laws governing the

employment of foreigners likewise imposes liability arising from the

unlawful employment of persons based upon the principal of deemed

employment where a person appears in substance to be performing work

for another who appears to be employing him.

•  The legislation on Minimum Retirement Age has introduced new

ambiguities.

Conclusion

I would conclude by saying that with the rise of costs and the thinning of margins, all

firms are compelled to robustly consider areas for optimization. If applied in good

faith these initiatives enable individuals to grow in their vocation on a greater scale

than they could as employees, more so if they are employees who are not engaged in

a core function or whose services are viewed as ancillary. It is not an option to

alienate these initiatives or to condemn them with suspicion born of simplistic

thinking. Regulate them by all means, but the time has certainly come to recognize

and to accept the fact that we now live in an age and time when people will work

together, perform services for reward in relationships that are not of employment.